Yellen’s hot pursuit of a Russian oil price cap could turn cold due to dubious chances of success

  • Janet Yellen is pushing for an oil price cap which will help cut resources for Putin’s war machine while avoiding the devastating economic consequences of an insurance ban.
  • Yellen will demonstrate her diplomatic skills if such a deal goes through, but this is unlikely to happen according to experts.  
  • A successful oil price cap could avoid division within the EU and further alienation of Western economies from the Global South.

Why is Yellen hot?

Answer: Yellen is hot as she pursues a price cap on Russian oil, a proposal that could help reduce Russia’s oil revenue and avoid a global economic shock.   

On July 20, the US Deputy Treasury Secretary, Wally Adeyemo, stated that the US hoped to see a global price cap on Russian oil be implemented by December of this year. The idea of a price cap on oil has been recently endorsed by the leaders of the G7 at their summit in June and by their foreign ministers on the 2nd of August. However, the key figure that has been working on building a coalition of states to endorse the price cap has been US Treasury Secretary, Janet Yellen. 

Yellen took advantage of the sidelines of the G20 Finance Ministers and Central Bank Governors Summit in Bali on July 15 and 16 to discuss the proposal with various countries. Yellen has also on other occasions negotiated the proposal with China and India. As Yellen continues to negotiate with countries on the matter it is important to understand the origin of the proposal.

The European Union adopted its sixth package of sanctions on the 3rd of June. In addition to phasing out EU imports of Russian oil, the package includes a prohibition for EU companies of “insuring and financing the transport, in particular through maritime routes, of oil to third countries.”  The UK agreed that it would also implement the insurance ban in coordination with the EU. The implementation of this measure could virtually stop Russian exports of oil as over 90% of the world’s ships are insured via the International Group of P&I Clubs mostly formed of UK and EU companies.

The sudden removal of very large quantities of oil from the market (Russia normally accounts for 10% of world oil production), could cause oil prices to further rise. To avoid this, Yellen is proposing an exception to the ban. Namely, if Russia agrees to sell its oil below a certain price it will be allowed to access the services needed to bring its oil to the market. The price has yet to be set but it would have to be one that would still make it profitable for Russia to keep exporting oil. Experts estimate that the price would be somewhere between 40 and 60 dollars per barrel

The initiative serves Yellen in three ways. First, a price cap on oil would help reduce Russia’s resources to finance its war machine. Russia’s oil and gas revenue accounted for 45% of its federal budget in 2021 according to the International Energy Agency. Even though Western sanctions have decreased the quantity of oil that Russia exports, the price spike means that Russia has not seen a loss of oil revenue and thus has not seen a big reduction in its annual budget.

Indeed, Russia earned 20 billion dollars from its export of oil in May 2022, roughly the same amount that it earned in January 2022 before the invasion began. Russia’s oil revenue in 2022 could even surpass that of 2021 by one fifth.  

Second, an oil price cap could help avoid the devastating consequences that an insurance ban on Russian oil transport could have on world economies. Following Russia’s invasion of Ukraine, oil prices skyrocketed. The Brent benchmark price for oil was above 100 dollars at the beginning of July. The latest package of sanctions could further aggravate this price spike, causing prices to soar above 200 dollars. This would aggravate already soaring inflation and slow growth in the US and elsewhere in the world.

Third, if successfully negotiated a price cap deal would be an important success for Yellen professionally. Yellen already has had a remarkable career being the first person to have served as Chief Economist at the White House, Chair of the American Federal Reserve and Secretary of the US Treasury and first woman to have held the latter two positions. During her time at the Federal Reserve Yellen has been credited with helping reverse the crisis following the pandemic and driving the longest economic expansion in American history. 

However, during her time at the Treasury, Yellen has not seen as much success. Even though Yellen has restarted negotiations of a global minimum corporate tax and has managed to persuade over 130 countries to support the initiative, she has been criticised for the way that she has handled rising inflation. Yellen herself acknowledged that she was mistaken on the way in which inflation was heading and has been criticised for her lack of political messaging on the issue. The negotiation of a price cap has pushed her more centre stage and could prove her to be not only a knowledgeable technocrat but a skilled diplomat as well.

What is changing her temperature?

Answer: Yellen is unlikely to stay hot for long since experts claim that there are several obstacles to the implementation of a price cap on oil.

There has been widespread scepticism among experts that Yellen’s proposed price cap could work in practice. First, Russia’s leader Vladimir Putin could seek alternative insurance arrangements or use Russia’s own fleets to transport the oil. While this alternative insurance may be suboptimal to western ones, countries may still decide that obtaining Russian oil at lower prices than from other suppliers is worth the risk

Second, Putin could simply refuse to export Russian oil at the price cap. Oil production could continue at minimal levels that would avoid the costs of shutting down the oil wells. While it is true that Russia’s currency and economy would suffer significant pressure, Putin may reason that the harm would be greater for European economies and decide to still push forward with the export ban. Third, Putin could resort to secret side deals with other countries. He could for instance agree to export oil at a lower price but demand that other Russian products be bought to compensate for the lower revenue. 

Nevertheless, Yellen has expressed optimism that these challenges could be overcome. While Russia could resort to alternative insurance providers, transit routes may refuse to allow such ships to pass through.

Furthermore, Russia may decide to continue with oil exports if the price makes it profitable for it, especially since an export ban could put it at odds with OPEC countries. Lastly, while the price deal could be bypassed by way of side deals, countries would still have a better bargaining position than they do now. They would be negotiating from a 50-dollar price for instance as opposed to the current near 100-dollar price. Russia would therefore still end up with cheaper deals and smaller revenue. 

Ultimately, a price cap on oil prices would only work if India and China agree to it. Currently the two countries are buying 1 million barrels per day and account for 20% of Russia’s exports. Yellen argues that China and India have a clear incentive to cooperate as Russia is not their only oil supplier. Lower global oil prices would thus reduce their oil supply costs. However, instead of a price cap, China has already expressed that it would prefer to see peace talks and an end to the war with Russia, a proposal that part of the West still rejects. 

What is driving her?

Answer: Yellen is driven by the belief that the oil price cap could help tackle inflation in the US, help impede the worsening of a dire humanitarian crisis and is needed to maintain Western strength and unity. 

Part of the reason that Yellen is chasing a price cap on Russian oil is the belief that it is one of the US’ “most powerful tools to address inflation.” The US Treasury assumes some of the most critical tasks of the state, including maintaining financial stability at home and abroad. This explains why the number one issue on Yellen’s agenda has been tackling inflation even though the Federal Reserve is the institution charged with monetary policy. Crude oil prices soared above 120 dollars per barrel following the Russian invasion causing consumer inflation in the US to soar to a 40 year high of 9.1% in July. Curbing oil prices could help halt this worrying trend. 

Yellen is also driven by the desire to curb inflation out of concern for the devastating humanitarian costs it could bring. Throughout her career Yellen has repeatedly emphasised her concern for the unemployed and those at risk of poverty. Populations facing hunger and refugees are already struggling with reduced aid funding. Higher prices mean less can be done with the funds that are received. 

Lastly, Yellen may also hope to avoid the negative consequences that the EU’s sixth package of sanctions could have on western strength and unity. Cutting Russian oil exports completely will be difficult to enforce and will not deal the fatal blow hoped for. The question thus arises whether the sanctions are worth the economic cost it would have on the Western world?

The US is also engaging in a two front great power competition and will want to limit as much as possible the effects of the Ukraine war on its ability to confront China in the Indo-Pacific. Furthermore, if the US hopes to engage in protracted conflict with Russia it cannot afford for resolve to continue weakening among allies as will surely be the case should energy price spikes and raw material shortages continue. 

What does this mean for you?

Answer: If the price cap is implemented it will help stabilise oil prices but if it is not, EU and UK sanctions will bring about severe economic consequences, cost the West politically and expose the shortcomings of economic sanctions.

If the price cap is implemented, oil prices will stabilise as will inflation. Citizens will still feel severe economic consequences of the war and of western sanctions but at least the situation will not deteriorate. If the oil price cap is not agreed upon, the EU will still move forward with its sanctions, as failing to do so after months of negotiation would be politically costly. It may however choose to implement a softer form of sanctions as UK commitment seems to be waning. Nevertheless, the sanctions would still have serious economic and humanitarian ramifications, especially if Russia retaliates in the form of a complete cut of gas supplies to the EU

The sanctions could also cost the West politically. The West has already alienated itself from the Global South which does not share its belief that Russia should be isolated, as reflected by the open reception of Foreign Minister Sergei Lavrov in various African countries last week. Some African countries are already blaming the EU for the food crisis, a view that has been sustained by Russian state backed media on the continent. An insurance and financing ban on Russian oil transport would only alienate the West further from the Global South. 

To conclude, the war has exposed the changing way that economics is used in foreign relations. While it is certainly not the first time that the US has resorted to economic sanctions to pressure a country to change its behaviour, the sanctions against Russia have been impressive given their scope and size as well as Russia’s position as an important exporter of hydrocarbons to US allies. While the use of economic sanctions has been proliferated, the economic and political harm that UK and EU sanctions on Russian oil would bring about reflects that economic sanctions are not easily controlled.